As 2022 looms, are insurance-linked securities maturing?

The insurance-linked securities (ILS) sector does not receive the same coverage that others in the insurance industry do. It operates, in many ways, through the back door and within plain sight.

That said, Paul Schultz, chief executive officer of Aon Securities, visited Intelligent Insurer’s Re/insurance Lounge, the virtual hub for the on-demand platform for interviews and panel discussions with industry leaders, to speak buoyantly about developments in the market over the last year.

“There were,” Schultz said, “a lot of positives.”

He went on: “We started with a good foundation of renewal-type transactions throughout the year that set the pace for what would happen. On top of that, we saw fresh inflows of capital into ILS managers that were not only increasing, but have been doing so for the last 18 to 24 months. That’s a trend we see continuing.”

There are a number of things in the air, said Schultz, that support this.

“As we turn the corner into the latter part of Q3, running into Q4, and even looking ahead into 2022, I think we’re in a good place on a comparative basis when you look at the pricing metrics and the terms and conditions.”

A busy time of year

Schultz sat down with Intelligent Insurer at the beginning of September as the renewals season was about to kick off. Traditionally, the ILS sector has stood to the side of traditional renewals. Although ILS companies are always around at renewals time, they are not considered to be at the forefront of what goes on.

This comes down to when issuance is greatest in the market, said Schultz, the knock-on effect of which is to dictate when the renewals happen. “We tend to see our busy time of the year in the first half, and not towards the second,” he said.

But there is, said Schultz, a place for the ILS market at renewals season, particularly at the Monte Carlo and Baden-Baden events.

“There’s a strong focus on behalf of our brokers and account executives,” he explained, “on what’s available in the ILS markets that can complement what is placed traditionally. That interest also comes from insurers and reinsurers. So we’re actually very busy when we start to get into some of these pre-renewal discussions.”

Those discussions take a specific form with a specific aim, Schultz said. “The first hurdle is a kind of economic discussion. It’s around what type of returns one market is looking at in comparison to another market. Then it’s considering how to optimise the programme from an economic perspective.

“Once you’ve cleared that, you’re then looking at terms, conditions, and wordings, and how multi-year capacity can work alongside an annual renewable capacity.”

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Class is permanent

The last two years have been the story of COVID-19, with the traditional insurance industry having to batten down the hatches and take close looks at policy wordings and exclusions. These are lessons, Schultz said, that have been carried over into the ILS sector.

One of those lessons, he said, is that the sector, as an asset class, is very resilient, particularly in light of the difficult periods in the first half of 2020.

“We demonstrated that the ILS asset class performs broadly in a non-correlated way, which is why many investors put their capital into this space.

“That doesn’t mean that we didn’t have some issues around liquidity when the multi-strategy funds wanted to potentially sell out their ILS positions and look to deploy into more opportunistic asset strategies. That did happen, but it was pretty short-lived,” he said.

Schultz is proud of the resilience of ILS. “That’s something we want to highlight, because if you go back 15 years, people questioned whether all this was a fad.

“They wanted to know if this would be a permanent asset class. We’ve demonstrated, and continue to demonstrate, that this is a permanent asset class. There will, of course, be cycles but I don’t think you hear those questions around longevity today that you used to.”

Speaking of fads, environmental, social and corporate governance (ESG) factors investing has been the topic du jour in 2021, with insurers and investors falling over themselves to prove their green credentials. Not surprisingly, Schultz said that ILS could play a leading role in this space.

“This is because we start with a founding principle that we are going to have a high level or good amount of disclosure. And ESG, at its heart, is all about disclosure, with a lot of investment behaviours today already fitting into an ESG mentality,” he said.

As for 2022, the plan is to continue expansion. Schultz said that Aon had made a number of key senior hires to support that.

“It’s not only in the traditional markets of the US and UK that we have capacity,” he said. “We also have capacity in Hong Kong, Tokyo, and Sydney. We have a global franchise around ILS, and we’re building the next leg of the stool in a more-sustainable way that will lead to greater conversations, not only within the insurance space, but also across the Aon-wide client base,” he concluded.

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